Wealth is wonderful for families to have, but it can be lost quickly if those handling the money aren’t prudent. It’s estimated that 70% of wealthy families will lose their wealth by the second generation, and 90% will squander it by the third, according to a study by the Williams Group wealth consultancy.
Fortunes collapse because of family squabbles and other mistakes that could have been avoided with proper planning, says John Smallwood, president of Smallwood Wealth Management and author of It’s Your Wealth – Keep It: The Definitive Guide to Growing, Protecting, Enjoying, and Passing On Your Wealth.
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“Enduring wealth, the kind that transcends generations, boils down to teaching family members at an early age the principles of saving and hard work,” Smallwood says. “When these principles are emphasized, preparing the next generation for responsible financial management has a decent chance of being successful.
“But strategically optimizing family wealth for generations also comes down to communication between the generations, and there seems to be a real disconnect between the generations when it comes to talking about wealth. And there is a fundamental misunderstanding of how to pass money well. Saving and protecting multigenerational wealth requires alignment among all family members.”
Tips To Help Families Protect Wealth
Smallwood offers these three tips to help families protect and grow their wealth across generations:
Open conversation between generations
Money is often a subject that families avoid, and as a result family members don’t understand how to protect and grow the wealth that has been worked for. “It requires open communication with family members, addressing topics that are personal in nature,” Smallwood says. “The successful families I’ve worked with over the years have had a willingness to be open with each other about the wealth that they’ve created. The more open the conversation, the better future generations will be able to avoid pitfalls and traps that place wealth under attack.”
Learn wealth-sustaining/growing financial strategies
Smallwood emphasizes that preserving wealth from generation to generation is about education and the protection pieces that are put in place. That may require a financial planner, but with each generation having different financial philosophies and priorities, it’s first up to the parents to emphasize the importance for the next generation to sustain financial growth. “The baby boomer generation, much of which is now retiring, usually had steady jobs and an abundance of material niceties,” Smallwood says. “Since then, there’s a generation that has seen tremendous growth in incomes and lifestyles. Kids born into that lifestyle have become accustomed to it. But when those kids try to leave the nest, they’re shocked to find out just how much money it takes to run a household.”
Pay special attention to tax ramifications
"Historically, estate taxes have been known to devastate wealth,” Smallwood says. “It’s impossible to know what the trends will be in the future. And maybe you’ve accumulated a lot of your own personal wealth, then inherit money on top of that. Then you could end up in a higher tax bracket. With poor planning, you could be looking at 40 to 50% drains of wealth over multiple generations. Financial planners can help you be strategic and set up layers of asset protection – wills, revocable trusts, spousal lifetime access trusts, life insurance – in order to protect inherited money for you and following generations.”
“Protecting wealth from all financial pressures should be the foundation of any wealth plan,” Smallwood says. “It requires consistency to stay up to date on new information, a family commitment, and work with a team of professionals. If the money is going to come to you, it must be managed properly so that it can be passed from one generation to the next.”
About John L. Smallwood, CFP®
John L. Smallwood is a senior wealth advisor and president of Smallwood Wealth Management and affiliated companies, providing investment consulting and financial plan design for corporate executives, entrepreneurs, and professionals. He is the author of It’s Your Wealth – Keep It: The Definitive Guide To Growing, Protecting, Enjoying, And Passing On Your Wealth, and a previous book, Five Ways Your Wealth is Under Attack.